Sunday, January 16

The proposed national social security fund is not the solution

FIFI PETERS: I suppose that related to the unemployment figures is the issue of retirement savings. The reason why getting more people to work is so important to us is that it will increase our ability to ensure that many people can retire comfortably when they reach that stage.


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Last week, the government issued a green paper for public comment, talking about making some changes in the retirement industry. Currently, many people do not contribute to funds that can provide income when they are no longer of working age, and the government wants to make it mandatory for people to contribute a portion of their salary to a state security fund. The idea is to provide income security in case of unemployment and disability, and even retirement, to many more people.

We have South Africa’s largest pension fund manager Alexander Forbes on the show just to share his thoughts on the proposal. We spoke with John Anderson, investment and enablement executive at Alexander Forbes. John, thank you very much for your time. Just tell us what this proposal, if implemented in its current form, would mean for your members.

JOHN ANDERSON: Thanks, Fifi. I appreciate. We have done some numbers just to take a look at it. Obviously, in the industry there are people who are covered by private occupational schemes, where an employer would implement a scheme. And then you get people who contribute on their own, and you get people who are discovered. You also get the public sector, the Pension Fund for Government Employees, and the municipal schemes, where people contribute. Of the 50 million people who are employed in South Africa, about half are covered by some form of retirement benefit, through an employer, the government or one of those plans.

If the current proposal in terms of the Green Paper goes ahead, which we do not think is likely for various reasons, it means that 7.5 million people who are covered, approximately 60% of them currently will be fully covered by national social coverage. security fund. What it effectively means is that for that 60%, for your salaries of up to R276,000 and contributions of 12%, your benefits will be covered by the state scheme, rather than your current schemes. While the current schemes are asset-backed, the new state scheme is essentially backed by a future promise, either from future generations or from future government.

And then, for salaries above R276,000, people can top up the national social security fund with certain accredited arrangements. So basically your existing schemes become complementary schemes and they are all covered by the national fund. Of the people who are currently not covered, including the informal sector, domestic workers, the agricultural sector, etc., all must contribute where they are not currently contributing, or be subsidized by the taxpayer, essentially. That is, in a nutshell, what would happen.

FIFI PETERS: As you described it, backed by a promise, and a promise that is not guaranteed if we look at what is currently happening in this economy and the fact that our government really does not have that much money.

But the problem here too, John, is the fact that the retirement industry, as it works right now, to the extent that it has come so far, has left many people behind on that journey. Therefore, the current system in itself is not effective for everyone. So, like Alexander Forbes, how can we make better changes in our retirement industry?

JOHN ANDERSON: I think it’s a great point. There are definitely problems that still need to be solved in the industry. If we go back 10 years, I think a lot of good changes have been made in the last 10 years just to make sure things are more transparent, more competitive. There has been industry consolidation that secures all of those things, but there are still a number of challenges, a big reason why people who currently contribute to schemes through employer fall short in retirement. It is not because they did not contribute; they contributed. But when they left the employer, because people on average change jobs about seven times before retiring, each time they change jobs, the vast majority withdraw their pension and then start over at the new employer.

So the first thing you need to change is to keep some, not all, preserved for retirement because compound interest accumulates. In fact, the National Treasury aims to tackle that next year through what they call the two-bucket system, where people can access some of the money for short-term needs, but in return they must make sure to preserve most of it. . long-term. If that happens you still need to go through a full process, that will address that specific deficiency. So that’s the first.

The second is that currently all employers can choose whether they want to establish an agreement for the employees. It is a choice, it is voluntary. There are many employers, be they SMEs, startups [or others] – they don’t have schematics in place. We know that if you don’t provide it through an employer, the majority won’t be spared.

So what the treasury is trying to do is try to introduce what they call “automatic enrollment”: use existing private sector arrangements that have management capabilities, and then have employers automatically enroll people; but then they can choose not to participate if it is not affordable and so on. That is the second.

And the third thing we think needs to be addressed is that when people retire, there is a state old-age pension available, but it has a means test. So before you qualify for that state old-age pension, which is supposed to provide a minimum (grant) to serve people on the poverty line, there is a means test. That actually acts as a disincentive for people to save. So before they retire, to qualify for the state old-age pension, they spend all the retirement money that is normally saved through provident funds and the like, and then they are worse off.

So remove that disincentive and remove the means test. If you do all of those things, your existing system can do better. However, what it does not address is the informal sector. That requires something very different. The current system has not been successful in serving that market and needs a different solution. It is one where a lot more work is needed. The current proposal is unfortunately not practical for that specific segment. But there are examples where it has worked.

FIFI PETERS: John, maybe it’s a conversation for another day, but your point is well made. Thank you very much for your time, even referring to the fact that many people collect their pensions and then get another job, assuming they even get another job. I know many people who collect their pensions and spend many years without a job, which exacerbates the crisis.

That was John Anderson, Alexander Forbes’ investment and habilitation executive.

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